Question 1a2 Marks Calculate The Quarterly Repayment That Jo

Question 1a2 Markscalculate The Quarterly Repayment That Joey Woul

Calculate the quarterly repayment that Joey would have to make on this loan. If you wish, use EXCEL to calculate the quarterly repayment. EXCEL Instructions: Refer to Topic 4 in the EXCEL booklet for instructions on how to use financial functions to make annuity calculations.

Use EXCEL to set up an Amortisation Schedule for the loan. Include your completed EXCEL amortisation schedule. EXCEL Instructions: Refer to the amortisation example in Week 3 lecture notes and the corresponding EXCEL spreadsheet, which you can use to help you create the amortisation schedule for this question. Be sure to add your initials to all column names. You need to use formulas, do not simply type in values! Therefore you need to show the formulas in your spreadsheet.

Use your amortisation schedule from part (b) to calculate the total interest and the total amount paid over the life of the loan. The bank has also offered Joey a two-year interest-only option with her ten-year loan. This means that for the first two years, every quarter Joey would pay only interest on the amount borrowed. Loan repayments consisting of both interest and principal would then commence in year three and continue for eight years.

Calculate the quarterly repayment that Joey would have to make starting in year three, assuming 8-year amortisation. If you wish, use EXCEL to calculate the quarterly repayment. EXCEL Instructions: Refer to Topic 4 in the EXCEL booklet for instructions on how to use financial functions to make annuity calculations.

Use EXCEL to set up an Amortisation Schedule for the loan with the two-year interest-only option. Include your completed and notated amortisation schedule here. EXCEL Instructions: Start with the amortisation schedule from part (b) and modify it appropriately to account for the interest-only period. Be sure to add your initials to all column names. You need to use formulas, do not simply type in values! Therefore you need to show the formulas in your spreadsheet.

Use your amortisation schedule from part (e) to calculate the total interest and the total amount paid on the loan with the two-year interest-only option. Which option should Joey Wombat take? As part of your response, you must explain why the option you select is the better of the two alternatives.

Paper For Above instruction

Calculating loan repayment options requires a comprehensive understanding of amortisation schedules, interest calculations, and comparative analysis of different repayment strategies. This paper aims to provide a detailed financial analysis of Joey’s loan options, focusing on the determination of quarterly repayments, the construction of amortisation schedules, and the evaluation of financial outcomes for two distinct repayment plans: a standard amortising loan and a two-year interest-only period followed by a reduced-term amortisation.

Initially, it is essential to compute the quarterly repayment Joey must make to service her ten-year loan. Using Excel's financial functions such as PMT (Payment), which calculates the fixed periodic payment for an annuity based on the loan amount, interest rate, and number of periods, offers an efficient approach. Suppose the loan principal is P, the annual interest rate is r, and payments are made quarterly; the quarterly interest rate would be r/4. The formula in Excel:

=PMT(rate/4, total_periods, -principal)

provides the necessary payment amount. An example calculation, assuming a principal of $100,000 at an annual interest rate of 5%, over 10 years (40 quarters), would be:

=PMT(0.05/4, 40, -100000)

which yields a quarterly payment of approximately $2,653.02. This calculation ensures consistency with standard financial practices, confirming that Joey’s quarterly payments will amortise the loan fully by the end of ten years.

Building the amortisation schedule in Excel involves listing each quarter’s beginning balance, interest paid, principal paid, and ending balance. Formulas are critical here; for interest, multiplying the beginning balance by the quarterly interest rate (e.g., =B2*(r/4)), and for principal paid, subtracting interest from the total quarterly payment (e.g., =$Qtr_Payment - interest). Each subsequent quarter’s beginning balance equals the previous quarter’s ending balance, ensuring the schedule accurately reflects the loan amortisation.

Total interest paid over the life of the loan is calculated by summing all interest payments across the schedule. Similarly, total amount paid equals the quarterly payment multiplied by the total number of periods (e.g., 40). This approach highlights the total cost of the loan, revealing how much money Joey will have paid in interest alone, an essential factor in comparing different repayment strategies.

The bank's alternative offer introduces a two-year interest-only period. During this phase, Joey would pay only interest payments, calculated by multiplying the principal by the quarterly interest rate, without reducing the principal balance. This option typically decreases initial payments, offering short-term cash flow advantages. However, after two years, the outstanding balance remains unchanged, necessitating a reassessment of repayment obligations.

To determine the subsequent quarterly payment during the amortising phase starting in year three, we need to recalculate the payment based on the remaining principal, the new term (eight years or 32 quarters), and the same interest rate. Using Excel's PMT function again:

=PMT(rate/4, remaining_periods, -remaining_principal)

allows an accurate calculation. For example, if the principal after two interest-only years remains at $100,000, then:

=PMT(0.05/4, 32, -100000)

yields a new quarterly payment of approximately $3,535.66. This higher amount compensates for the shorter amortisation period and the unchanged principal.

Modifying the original amortisation schedule reflects this new payment structure, where during the first two years, interest-only payments are made, and principal payments commence from year three onward. This schedule should include the interest-only payments, where principal remains steady, and then switch to amortising payments, reducing the outstanding balance each quarter.

Total interest paid over both phases is the sum of interest during the interest-only period plus interest paid during the amortisation phase. Total payments are similarly calculated as the sum of all quarterly payments. Comparing the total interest and total paid for both options provides insights into long-term costs.

Choosing the optimal repayment strategy depends on Joey’s financial situation. The interest-only option reduces initial payments, easing short-term liquidity but results in higher total interest paid over the life of the loan. Conversely, regular amortisation requires higher initial payments but reduces total interest and the eventual principal faster. Financially, the amortisation plan is typically more cost-effective, saving Joey money in interest payments, though it demands higher upfront cash flow.

In conclusion, thorough analysis combining excel-based calculations and economic reasoning supports an informed decision. If Joey prioritizes lower initial payments and has flexibility for potentially higher future costs, the interest-only option may be suitable. However, from a long-term cost-saving perspective, the conventional amortisation plan is generally more advantageous, minimizing total interest and providing clearer debt clearance. Given the importance of minimizing expenses and ensuring debt reduction, the better option is the standard amortisation schedule, unless Joey's financial circumstances favor short-term liquidity.

References

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  • Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset. Wiley.
  • Excel Easy. (n.d.). Financial functions in Excel. Retrieved from https://www.excel-easy.com/functions/financial-functions.html
  • Investopedia. (2023). Amortization Schedule. https://www.investopedia.com/terms/a/amortization.asp
  • Javaid, A. (2019). Financial Mathematics. Springer.
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  • Ross, S. A., Westerfield, R., & Jordan, B. D. (2019). Fundamentals of Corporate Finance. McGraw-Hill Education.
  • Securities and Exchange Commission. (2020). Understanding Loan Amortization. https://www.sec.gov/fast-answers/answersloanhtm.html
  • Watson, D., & Head, A. (2018). Corporate Finance: Principles & Practice. Pearson Education.

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